ADP said 206k private sector jobs were added in Nov, well above expectations of 130k and up from 130k in Oct (revised up by 20k). Both the goods producing and service providing sectors added jobs, again mostly led by small and medium sized businesses. Manufacturing in particular added 7k jobs and Construction added 16k jobs…Read More

In another attempt to ease LIQUIDITY stress, caused of course by SOLVENCY concerns (thus attacking the symptoms instead of the disease), the Fed, ECB, BOJ, BOE, SNB and BOC have lowered the interest rate on swap lines amongst them all from the $ overnight index swap rate + 100 bps to just +50 bps. The…Read More

Just 4 hours after the Shanghai index closed down 3.3% to a 5 1/2 week low, the PBOC cut reserve requirements by 50 bps to 21%, one week after cutting them for rural co-ops. Thailand also cut interest rates by 25 bps but some were hoping for 50 bps. The Chinese deserve a thank you…Read More

Award-winning journalist Charlie Rose interviews Seth Klarman, co-chair of the Facing History and Ourselves Board of Trustees, about his deep commitment to the work of Facing History and his thoughts on philanthropic and financial investment.

Iraq ☑ Libya ☑ … Syria ☐ Lebanon ☐ Somalia ☐ Sudan ☐ Iran ☐ I’ve repeatedly documented that the Neocons planned regime change in Iraq, Libya, Iran, Syria and a host of other countries right after 9/11 … if not before. And that Obama is implementing these same plans – just with a “kindler,…Read More

My Monday morning missive lamenting the pitiful state of our modern media seems to have gotten some traction. I also chatted with Aaron Task and Jeff Macke of Yahoo Finance about it. On the way in yesterday, I noticed these two articles in the NYTimes: • Rough Times Take Bloom Off a New Year’s Rite,…Read More

Steven J. Davis, Senator McCain’s chief economics advisor during his presidential campaign, has written a political hit piece on the man that defeated his candidate. His co-authors were Scott R. Baker and Nicholas Bloom. For the sake of brevity I will refer to the authors as “the authors” or “Davis.” They published the piece in

Bloomberg The article purports to be a straight scientific piece, but it is a partisan screed relying on faux statistics created by Davis to support his views. Davis’ statistical methodology is not simply unscientific, it is embarrassingly bad.

Davis’ argument, long discredited by actual surveys of employers, is that unemployment is so high because employers refuse to hire because of Democratic policies. As Paul Krugman has long noted, employers, when surveyed, have consistently and emphatically refuted this claim. Given that the employers answering the surveys are disproportionately Republicans and opponents of regulation who have strong incentives to blame the regulations for their failure to hire, their failure to do so makes the survey results particularly compelling. Davis’ statistical index provides no evidence of why employers are not hiring. Indeed, it is inherently incapable of providing such evidence.

Davis is a partisan Republican. He is a theoclassical economist and a proud representative of the one percent. He has worked for the Hoover Institution, AEI, and Michael Milken’s foundation (the infamous fraud whose crimes destroyed Drexel Burnham Lambert). He is a professor at U. Chicago’s business school.

Davis missed the developing crisis entirely, publishing an article about “the Great Moderation” in 2008 as the financial crisis was ripping across the world. His ideological blinders are so complete that he cannot even consider the obvious – the crisis was brought on by the criminogenic environment produced by the three “de’s” – deregulation, desupervision, and de facto decriminalization plus perverse executive and professional compensation. The economists George Akerlof and Paul Romer wrote an article about accounting control fraud entitled “Looting: the Economic Underworld of Bankruptcy for Profit.” They concluded the article with this passage about the criminogenic environment produced by S&L deregulation in the 1980s.

“Neither the public nor economists foresaw that the [S&L] regulations of the 1980s were bound to produce looting. Nor, unaware of the concept, could they have known how serious it would be. Thus the regulators in the field who understood what was happening from the beginning found lukewarm support, at best, for their cause. Now we know better. If we learn from experience, history need not repeat itself (1993: 60).”

The reason we have tragic levels of unemployment is the financial crisis, which was fully preventable had the anti-regulators put in place by Presidents Clinton and Bush simply understood the concepts of looting and criminogenic environments that we had made clear a quarter-century ago. As I will show, Davis takes the remarkable position that we must not learn from our deregulatory mistakes and close the resulting regulatory black holes.

Absent the restoration of effective financial regulation and prosecutions, and the removal of the perverse compensation systems (which also requires regulation), we will continue to suffer recurrent, intensifying financial crises and the severe unemployment they produce. Effective financial regulation greatly reduces uncertainty by increasing transparency and by preventing Gresham’s dynamics. George Akerlof explained to the profession 41 years ago in his famous article on markets for “lemons.”

“[D]ishonest dealings tend to drive honest dealings out of the market. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence.”
Consider the grave “uncertainty” that would exist in a nation without effective police forces. Somalia is a good example. The police do not, and cannot, deal with sophisticated financial crimes. The FBI’s white-collar crime specialists do not patrol a beat and look for crimes. They sometimes act on anonymous tips or leads from other investigations, but overwhelmingly they depend on criminal referrals from the regulators. Our principal function as regulators is to serve as the regulatory cops on the beat to prevent the Gresham’s dynamic by aggressively finding the frauds, putting them out of business, and providing the criminal referrals that make it possible to prosecute the elite frauds. Absent effective regulators, honest firms often face extinction and their employees will lose their jobs.

In Davis’ world, however, regulation is unnecessary and harmful. The former U. Chicago professors, Frank Easterbrook and Daniel Fischel, wrote what remains the U. Chicago bible on accounting control fraud. A generation of American lawyers has been taught this profession of faith from Easterbrook and Fischel’s 1991 treatise: “A rule against fraud is not an essential or even necessarily an important ingredient of securities markets….” The Economic Structure of Corporate Law (1991). Markets are self-correcting, bubbles are impossible, and economic crises are impossible. This was the theoclassical profession of faith in a miraculous trinity. Each of these dogmas has been repeatedly falsified by real life, but facts cannot trump blind faith. Senator McCain’s was a member of the “Keating Five.” Charles Keating, the most infamous S&L fraud, used the Senators to try to intimidate us into not taking any regulatory action against Lincoln Savings’ massive regulatory violation – a violation that led to billions of dollars in losses. Neither McCain nor Davis learned any useful lesson from this scandal.

Davis has mounted politically consistent attacks on the Democrats based on the high unemployment caused by the epidemic of accounting control fraud that hyper-inflated the bubble and drove the U.S. financial crisis. On January 3, 2010 he published an op-ed with Gary Becker and Kevin Murphy in the Wall Street Journal blaming the Democrats for the high unemployment caused by the Great Recession. This was their tag line: “A recession is a terrible time to make major changes in the economic rules of the game.”
Consider the logic of that assertion. The “economic rules of the game” have just led to an epidemic of accounting control fraud, a hyper-inflated bubble, a Great Recession, and severe unemployment and the theoclassical answer to the catastrophe that their faith-based policies have caused is – engrave those rules in bronze. They literally call on us to repeat the mistakes of the past. Theoclassical economists take their cue from the White Queen, who bragged to Alice that with practice she had learned to believe “as many as six impossible things before breakfast.”

The authors acknowledged that the Great Recession had caused severe unemployment, but added the claim that it was the election of Democrats that prevented a prompt recovery.

“Liberal Democrats won a major victory in the 2008 elections, winning the presidency and large majorities in both the House and Senate. They interpreted this as evidence that a large majority of Americans want major reforms in the economy, health-care and many other areas.”
Obama’s economic team (Summers, Geithner, and Bernanke) was strongly neoclassical and economically conservative. The authors then singled out any effort to deal with climate change as particularly undesirable. Apparently it is now a violation of theoclassical principles to require manufacturers to internalize the cost of negative externalities. That is contrary to economics and would lead to a poisoned world in which firms that spent money to restrict harmful emissions would be driven out of business by their competitors who avoided such expenses and obtained a decisive cost advantage. This is another example of a Gresham’s dynamic in which bad ethics drives good ethics from the marketplace. The authors ended by opposing allowing the Bush tax cuts for the wealthy to expire. They presented no evidence in support of their partisan attack on Democrats and their ideological attack on “liberals.”

Davis mentioned “policy uncertainty” as one of the contributors to the employers’ failure to hire workers in this article, but what he stressed was that the Great Recession so depressed private sector demand for goods and services that most employers felt little desire to hire additional workers because they could not sell additional output. He noted that employers had reduced the intensity of their recruiting because they were in a buyer’s market in which they were deluged with applicants and could afford to hire only the most ideal candidates. Even when Davis discussed uncertainty his primary emphasis was on economic uncertainty – the Great Recession. He ended by blaming unemployment on the unemployed. The long-term unemployed were spending fewer hours looking for jobs. Davis called for ending unemployment benefits for the long-term unemployed. The prospect of starving in a fortnight would concentrate their minds wonderfully. (Yes, Davis’ last argument contradicts his earlier arguments, but this is faith-based callousness posing as science.) His “summing up” paragraph has one clause referencing “uncertainty” as a purported tertiary contributor to the slow reduction in unemployment. Again, Davis offered no support for this assertion.

Davis’ latest (October 5, 2011) partisan attack is entitled “Policy Uncertainty Is Choking Recovery.” In five months, Davis’ tertiary, minor asserted contributor to the slow recovery has suddenly morphed into a monster that is the cause of the problem. You might think that the survey results showing that businesses have repeatedly falsified this claim would pose a problem for this meme, but the authors hit on the obvious answer to inconvenient truths – they ignored them. Lest you think that this was due to tight space limits placed on a Bloomberg op ed, check their academic paper, which, also ignores the actual surveys. “Measuring Economic Policy Uncertainty” (October 10, 2011). This begins to explain why their work is embarrassingly bad.

The partisan slanting of the article is also embarrassing, as is the failure to identify Davis’ role as McCain’s principal economics advisor. Here is the authors’ thesis:

“But the persistence of policy uncertainty wasn’t inevitable. Rather, it reflects deliberate policy decisions, harmful rhetorical attacks on business and “millionaires,” failure to tackle entitlement reforms and fiscal imbalances, and political brinkmanship.”

Their thesis boils down to the claim that capitalists are wusses. The reality is that politicians of both parties fall all over themselves saying nice things about business and that the criticisms are addressed to corporate criminals and the wealthy who pay what the vast bulk of Americans view as grossly inadequate taxes. Moreover, according to the neoclassical economics canon these authors purport to believe raising taxes on the wealthy would be a valuable change that would reduce “fiscal imbalances.” The authors, instead, assert that any increase in taxes on the wealthy destroys jobs. By their logic, we should eliminate taxes on the wealthy. By entitlement “reforms” they mean reducing Social Security benefits – that will do wonders for private sector demand and robust jobs growth.Read More

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About Barry Ritholtz

Ritholtz has been observing capital markets with a critical eye for 20 years. With a background in math & sciences and a law school degree, he is not your typical Wall St. persona. He left Law for Finance, working as a trader, researcher and strategist before graduating to asset managementRead More...

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